Wednesday, October 3, 2007

On the subject of frugality

I've been thinking a lot about the topic of frugality lately, and just read a good writeup on it at The Simple Dollar (via Get Rich Slowly). I also like the Wikipedia entry for frugality, which is as follows:

"Frugality (also known as thrift or thriftiness), often confused with cheapness or miserliness, is a traditional value, life style, or belief system, in which individuals practice both restraint in the acquiring of and resourceful use of economic goods and services in order to achieve lasting and more fulfilling goals. In a money-based economy, frugality emphasizes economical use of money in meeting long term personal, familial, and communal desires.

Might also mean economical or avoiding waste."

To me, being frugal is about prioritizing my (limited) resources to focus on things that are most important to me, and bring me true happiness. It isn't about deprivation, neglecting wants, or being stingy for the sake of accumulating money above all else. It is about maximizing the returns on my hard earned money so that I get the most value (taking into consideration quality and price) in accordance with my priorities.

While I consider myself to be frugal, other people may not view me in the same light because their priorities are different than mine. For example, my house is much bigger than I need, and not representative of the typical Millionaire Next Door at all. "Your Money or Your Life" describes the concept of having "enough", and a smaller, more modest home would certainly meet my needs.

Am I being wasteful by having a larger residence than I need? Perhaps, since my utility bills are bigger than a smaller place would generate, and my land usage is more than I require. I struggle with this dilemma sometimes, but in the end I realize that life would be pretty dull if we only satisfied our needs. I truly enjoy my home, and the fact that it's an appreciating asset is icing on the cake. I could downsize and live completely debt free, but I've done that before and buying stocks just isn't as satisfying to me as building home equity.

On the other hand, I'm very economical in other areas. For example, I don't buy designer clothing as I don't care about brand names. I don't drive a luxury car, or carry a ton of gadgets. I recycle as much as I can to reduce my impact to the environment. I don't smoke or drink alcohol/soda/coffee, and while that's primarily health driven, I also consider them a waste of money because I derive no pleasure from those substances. I brown bag my lunch to work every day (I do spend quite a bit amount of money on organic foods, so while I may not be saving money in the short term, it is cheaper than eating out in the long run if you consider the health benefits).

So frugality is a matter of perspective, and I try not to judge others based on what they choose to spend their money on as long as they're getting true enjoyment out of it. However, if they fail to live below their means, then I would not consider them to be frugal. Achieving wealth requires that you spend less than you earn, and invest the excess. Being frugal can help you accomplish that by eliminating wasteful spending on stuff which doesn't bring you happiness, leaving you with more to invest.

To summarize, my acid test for frugality is:

1. Does it bring you true, long term happiness?
2. Does it prevent you from meeting your financial goals?

If you answer 1) yes and 2) no to those questions, then you've passed the frugality test.

1 comment:

Millionaire Mommy Next Door said...

Great explanation of frugality as a path to wealth, while honoring individual priorities.

As you've read, we choose to spend less on housing now, but then we choose to spend a generous amount on travel and free time instead. It's so important to recognize what makes you happiest!

Thanks for sharing.